EXPERTS recommend you invest money for your children in the stock market — but beware funds specifically marketed at young people.

Shares are more risky than a simple savings account, but returns have historically been better over the long term. Equities have produced an average return of 8% a year in the past 20 years after inflation, against just 4.4% for cash, according to Barclays Equity Gilt Study.

Kerry Nelson of Willis Owen, an independent adviser, said: “The longer you have to invest, the lower the risk of losing money — and the better your chances of producing strong gains. Shares are often ideal investments for children.”

Children under 18 cannot hold shares directly, but an adult can invest on their behalf. It is usually easier to invest in funds such as unit or investment trusts. The investment company will usually set up the fund as a “bare trust”, in which the adult is the named investor and the child the named beneficiary.

A number of investment companies offer funds specifically aimed at people saving for children. They tend to have low minimum investment levels, but are often poor value.

Invesco Perpetual’s Rupert Children’s Fund, for example, has a minimum lump-sum investment of £1,000, or you can invest £20 a month, lower than the typical monthly minimum of £50. From July 31 it will simply be known as the Invesco Perpetual Children’s fund. There is an upfront fee of 5% and an annual charge of 1.5%.

However, the fund has failed to produce decent returns. In the past five years, it has lost 19.61% after charges, compared with a loss of 13.82% for the average growth fund.

Aberdeen Asset Management also targets parents and grandparents with three funds under the “Thomas” brand. There is a minimum lump-sum investment of £400, or £25 a month.

But the funds are not strong performers. Over the past five years, for example, the Aberdeen World Equity fund has dropped 37.83%, Aberdeen UK Opportunities has lost 37.45% while the Ethical World fund has dropped 25%. The fees are 4.25% upfront and 1.25% a year on the UK Opportunities fund or 1.5% on the Ethical World and World Equity funds.

The Witan Jump plan has lost 22.7% in the past five years against a drop of 2% for the average global investment trust.

Foreign & Colonial has just launched a Children’s Investment Plan, based on its existing Private Investor Plan, which allows investors to put a minimum of £25 a month into any of its eight investment trusts, including the F&C Investment Trust. It has performed slightly better than Witan, falling 17.6% in value over the past five years, but is still behind the average.

Fees on investment trusts are often lower than for the equivalent unit trust or open-ended investment company (Oeic).

F&C, for example, has annual expenses of 0.5%. But you will have to pay a 0.2% fee to buy shares in the trust, plus 0.5% stamp duty. There is also a fee of 0.2% if you switch your investment or sell it.

At Witan, another investment trust, there is no annual management fee, although the same stamp duty applies. Under £15,000, there is a 1% dealing charge, which reduces to 0.5% above that figure. Surrender charges are 1% below £15,000 and 0.5% below that.

Ben Yearsley of Hargreaves Lansdown, another adviser, said: “Children’s funds are often marketing gimmicks. If you are planning to save for a child consider how long you plan to invest and how much risk you are prepared to take.”

Yearsley recommends steady funds such as Invesco Perpetual Income or Jupiter Income as a foundation for the portfolio. The schemes have produced consistently good returns and the minimum investment is as low as £20. Nelson also likes Invesco Perpetual’s Income fund and DWS Equity Income.

It makes sense to reinvest the income when investing for children. Yearsley said: “Investors should expect a return of 7% to 8% a year from shares — almost half of it from dividends. A child doesn’t need an income and if you plough it back into the fund it will make a big difference to the eventual value.”

Advisers often recommend you take a bigger risk with your children’s investments than you might with your own. Nelson said: “If you’re saving over the long term, you can invest in areas such as emerging markets, Asia or Japan. They have the potential for superior returns in the long run.”

She backs Framlington Emerging Markets, Legg Mason Japan, Invesco Perpetual Hong Kong & China, and First State Asia Pacific Leaders. Yearsley likes First State Emerging Market Leaders and Aberdeen Far East Emerging Economies.